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BoE leaves the Bank Rate unchanged in September as Brexit clouds linger

United Kingdom Monetary Policy September 2019

United Kingdom: BoE leaves the Bank Rate unchanged in September as Brexit clouds linger

September 18, 2019

On 18 September, the Monetary Policy Committee (MPC) of the Bank of England (BoE) voted unanimously to keep the Bank Rate unchanged at 0.75%. The Committee also agreed to maintain the stock of investment-grade corporate bond purchases at GBP 10 billion and the stock of UK government bond purchases at GBP 435 billion, financed by the issuance of Central Bank reserves. All decisions were in line with market expectations.

The lack of clarity over the outcome of Brexit means the MPC is currently in a decision-making holding pattern, as different Brexit scenarios have very different implications for monetary policy. Putting Brexit aside, however, the MPC was not under pressure to raise rates as inflation moderated to 1.7% in August and is expected to float around the BoE’s 2.0% target rate in the coming months, supported by a tight labor market producing strong wage growth. Meanwhile, the economy contracted in quarter-on-quarter terms in the second quarter, which likely further kept the MPC away from the rate-hike trigger. On the external front, trade tensions between the U.S. and China have continued to increase in recent months and are weakening the global economic outlook more than the MPC previously expected.

Going forward, the future direction of the BoE’s monetary policy will ultimately depend on the outcome of Brexit. In the event of a smooth Brexit and some recovery in global economic growth, the Committee said that an increase in the Bank Rate, at a “gradual and to a limited extent, would be appropriate to return inflation sustainably to the 2.0% target”. However, a rate hike is only likely once Brexit uncertainty dissipates, and the Committee also left the door open to monetary easing in the case of a disorderly withdrawal. In the opinion of ING economist James Smith, “the prospect of further tightening still seems very distant”.

On balance, most of our panelists see the Bank staying put this year, although the vast majority see tightening by the end of 2020. The Consensus is for the Bank Rate to end 2019 at 0.75% and 2020 at 0.88%.

Author:Edward Gardner, Economist

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